When it comes to making any technical analysis, we cannot forget the importance of the Japanese candlestick chart. In this article we will explain some basic stock market strategies by interpreting the Japanese candlestick chart (or Candlestick in English), although first we will explain what a Japanese candle is.
A Japanese candle is a figure that shows the evolution of the price of an asset over a given period . Next, we will explain the components of the figure.
Prices marked on a Japanese candle. What does OHLC mean?
OHLC in English Open, High, Low, Close are the 4 prices that mark a Japanese candle (opening, maximum, minimum and closing).
On a Japanese candle, it indicates 4 session prices , the maximum price reached, the minimum reached, the closing price and the opening price.
In the previous image you can see perfectly the four prices that we had previously indicated . In addition, it can also be seen that if the session closes above the opening, the figure is green and otherwise red. In other words, the green color indicates that the asset’s value increased during the session and is called a bullish candle, while red indicates that it has fallen and is called a bearish candle.
Components of a Japanese Candle
Japanese candles are made up of two components, the body and the shadows .
The other component of the candles is the shadows. C hamamos upper shade difference of the maximum session price compared to the price of opening / closing (depending on whether a high or low candle). On the other hand, the lower shadow is the difference between the minimum session price and the opening / closing price.
Types of Japanese candles
There are several types of candles and variants of these. Below, we will discuss the most basic types of candles, depending on your body size and shade, and what data these numbers may be indicating to us. In the image below, you can see the different basic types of candles.
The types of candles can be classified as:
1- Full and large candle : candles with very large bodies and very short shadows, or barely visible as in the figure. This type of candle indicates that the movement was unidirectional and that there was little doubt about whether to buy or sell.
2- Candle with full and small body: They are candles with very small bodies and almost imperceptible shadows. They indicate that there was little movement during the session.
3- Empty candle: candles without a body or shadows, indicate that the price of 4 candles (maximum price, minimum price, closing price, opening price) did not change during the session. It usually happens when there is no movement during the session.
4- Candle with empty body and long shadows: The body is empty because the closing and opening prices were the same, but the maximum and minimum achieved are far from the body. They usually indicate a change in the trend.
5- Candle with empty body and upper shade: All prices remained the same, except for the maximum price reached.
6- Candle with empty body and lower shade: All prices remained the same, except for the minimum price reached.
There are many other types of candles, but they are variants of those mentioned above. Anyway, it is not so important to know each type of existing candle, but the type of strategies to follow when faced with one or a series of particular figures . Below we list some basic strategies on how to operate with Japanese candles.
Some strategies with Japanese Candles
Bullish triple formation
Trimple formation bassist
The bullish Triple Formation is about two high and high body candles, with three small and low candles in the middle of them. It occurs in bullish trends and the candlesticks in the middle are only stuck at a few stops before continuing with the bullish trend . It is a very reliable standard.
The bearish Triple Formation is exactly the same, only that the trend is down.
engaging bass player
A bullish bullish candle occurs when a bullish candle is preceded by a bearish candle with a small body and an earlier bearish trend. Indicates a change in the trend, this case will be low to high. It is a reliable standard and it happens frequently.
For the bearish envelope , the explanation is the same only that the change in trend is bearish.
Upside down babies
Abandoned babies bass player
A bullish abandoned baby is formed by a bullish candle preceded by a doji (empty body with small shadows) and an earlier bearish trend. It is a pattern similar to the bullish envelope, only that an abandoned baby is a stronger and clearer trend shift.
An abandoned baby bass player has the same explanation, only that the change in trend is downward.
As we have seen, Japanese candles are very powerful tools in technical analysis , as there are many possibilities that certain patterns like the ones mentioned above can happen, and they are very easy to understand when you are used to them.
However, it should be noted that basing our investment decision solely on the analysis of the candles is very risky. Candles are just a few tools in technical analysis, so when investing, there must be more factors such as macroeconomic events, fundamental analysis, profitability indices like PER, among others.